The big central bank week is concluding with most remaining dovish as they weigh up economic growth, inflation, and the coronavirus disruptions. There will be a time when they all start paring back their asset purchases as the economies grow and the monetary policy used during the height of the crisis has less of an effect.
Market Brief
The forex markets have reacted positively to the FOMC statement from last night. Fed Chair Powell said that the central bank could be ready to taper asset purchases at the next meeting but have decided to wait for another jobs data report. The policy rate decision remained the same though more members are calling for rate hikes in 2022. This morning’s risk-on forex complex is largely due to the US dollar coming off from its highs which is boosting commodity prices. There have also been developments in the financial plumbing of the US and Chinese money markets. Both the New York Fed and the Peoples Bank of China (PBoC) have conducted larger reverse repo purchases. A reverse repo is a type of short-term loan the central bank uses to increase liquidity and influence other rates in the banking system. It also allows banks to keep within regulatory leverage ratios in the US, as the overnight loan of cash and equivalents to the Fed in return for Tier-1 collateral is required whilst the US is under the debt ceiling constraints.
In a statement issued last night, the Reserve Bank of New York to conduct overnight reverse repurchase agreement (ON RRP) operations with a per-counterparty limit of $160 billion per day, effective September 23, 2021. The increase in the per-counterparty limit from the current level of $80 billion per day helps ensure that the ON RRP facility continues to support effective policy implementation. All other ON RRP operation parameters remain the same.
Similarly, the PBoC injected CNY 60bln via 7-day reverse repo and CNY 60bln via 14-day reverse repose for a net daily injection of CNY 110bln.
The PBoC has been pumping billions of yuan into the banking system through reverse repurchase agreements, through September to boost financial markets sentiment during the Evergrande debt defaults.
The net result is that contagion fears and liquidity across the two major economies are being bolstered and the markets can be more risk-on in nature.
The USDCNH is within the middle of a channel so there is no clear directional trade currently. If the USDCNH were to travel into the previous support and resistance, the stochastic (10,3,3) could give a clue of when the currency pair is overbought or sold.
The US dollar index found a level of resistance and some supply and appears to be trading with the Andrews Pitchfork. As a guide, a break lower than the pitchfork and a close below the $91.92 would confirm the US dollar is once again in a downtrend. For now, it is within the $1.50 range.
The UK FTSE100 is having a very good week, and if we close at or above these levels the candle pattern is a bullish engulfing reversal pattern. The weekly moving averages have obviously acted as decent dynamic support and a break higher than 7238 will give traders hope of a retest of the 7650 level and maybe all-time highs.
Today is a big day for European data with Flash manufacturing data, SNB, and BoE policy and rate decisions. The Bank of England is expected to keep the bank rate at 0.10% with a unanimous vote, with the asset purchases remaining at £875bln. There could be a shift in the APF voting and traders will be looking for a more hawkish stance.
The pound is starting the London session relatively strong but is within a corrective pattern on the daily chart. Moving averages are looking more bearish but the 50 is still just above the 200 so the bullish momentum has a slim chance of carrying on. A weaker US dollar today would be useful.